krishnendu k p foreign portfolio investment

PRESENTED BY KRISHNENDU

K P MCOM, DCMS

April 17, 2023 1

CONTENTS

FPIMeaningStarting upOptimal portfolioAdvantages and limitations of FPIRegulations for

FIIsNRIs / PIOsFVCs

JULY 16 2015FPI 2

FPI denotes all those investors or investment companies that are not located within the territory of the country in which they are investing.

In economics FPI is the entry of funds into a country where foreigners make purchases in the country’s stock and bond markets, sometimes for speculation

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FPI is positively influenced by high rates of return and reduction of risk through geographic diversification. The return on FPI is normally in the form of interest payments or non-voting dividends.

FPI is presently includes foreign pension funds, mutual funds, charitable/endowment funds etc. as well as asset management companies and other money managers operating on their behalf.

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It is the passive holding of securities such as foreign stocks, bonds, or other financial assets ,none of which entails active management or control of the securities issued by the investor.

Select an optimal portfolio where the risk- return trade-off is optimal .

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In 1992, India opened up its economy and allowed foreign portfolio investment in its domestic stock market

Since then ,FPI has emerged as a major source of private capital inflow in our country

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OPTIMAL PORTFOLIO

There is a balance between risk and return.

Return is maximum with a given level of risk or risk is minimum with a given level return.

Modern Portfolio Theory : Markowitz, Nobel Prize Winner Efficient frontier It represents the

most efficient combinations (portfolios) of all possible risky assets April 17, 2023 FPI 7

The Efficient Frontier

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D

CBA10

1.0 1.5 2.0

Measurement Of Risk Risk is measured by the dispersion of alternative

returns around the average/expected return. Expected return is based on probability.

Expected value, A = P1A1 + P2A2 +…………+ PnAn

P= Probability A= Actual return

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Example :1 40% probability for $ 300 return There is 20% probability for $ 500 return 40% probability for $ 800 return A = 0.4*300 + 0.2*500 + 0.4*800 = $

540

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Dispersion from the expected vaue is measured in terms of standard deviation.

Example : 2

Variance = 0.4(300-540) + 0.2(500-540) + 0.4(800-540)

SD (σ) = 224.5 Total Risk= Systematic Risk + Unsystematic

Risk

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2 22

Measurement of Return

The portfolio return is the weighted average of the expected return from different securities existing in the portfolio.

Portfolio Return

Rp = RAWA + RBWB

R = Return W = Relative share of investment A&B = Two securities

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Enhanced flows of equity capital FIIs have a greater appetite for equity

than debt.. It improve capital structures.Managing uncertainty and controlling

risks. FPI inflows help in financial innovation

and development of hedging instruments. Improving capital markets.

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FPIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets.

FPIs can help in the process of economic development and improve corporate governance.

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Problems of exchange ratePolitical Risk represented by the possibility

of change in the political environment resulting change in investment norms and repatriation regulations.

Emerging markets which are the beneficiaries of most FPI traditionally suffer from low retail participation which results in inadequate liquidity which results in price volatility.

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Due to the unpredictable nature of such funds there is a tendency to shift from one market to another at short intervals. Volatility arising out of FPI inflows and out flows has adverse effects on the host country economy.

Exorbitant transaction and information cost.

procedural formalities.

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April 17, 2023 17FDI & FPI

Distinction between FDI and FPI

FPI

18

FDI FPI

1. It is long-term investment 1.It is generally short-term investment

2. Investment in physical assets

2. Investment in financial assets

3. Aim is to increase enterprise

capacity or productivity or

change management control

3.Aim is to increase capital availability

4. Leads to technology transfer, access to markets and management inputs

4. FPI results in only capital inflows

5. FDI flows into the primary market

5. FPI flows into the secondary market

6. Entry and exit is relatively difficult

6. Entry and exit is relatively easy

7. FDI is eligible for profits of the company

7. FPI is eligible for capital gain

8. Does not tend be speculative

8. Tends to be speculative

9. Direct impact on employment of labour and wages

9. No direct impact on employment of labour and wages

10. Abiding interest in management.

10 Fleeting interest in management.

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RBI has granted permission to SEBI registered (FIIs) invest in India under Portfolio investment scheme.

All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian economy

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NRIs/PIOs can purchase/ sell shares / convertible debentures of Indian companies on stock exchanges.

An NRI or PIO can purchase shares upto 5% of the paid up capital of Indian company.

All NRIs/PIOs taken together cannot purchase more than 10% of the paid up value of the company.

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A foreign venture capital investor may make investment in a venture capital fund for an Indian venture capital undertaking as per the terms and condition of SEBI.

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American Depository Receipt (ADR)

A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange.

ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas.

ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.

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GDR ( Global Depository Receipt) A global depository receipt (GDR), also known as international depository receipt (IDR), is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. They are the global equivalent of the original American depository receipts (ADR) on which they are based.

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Characteristics of GDR

It is an unsecured securityIt may be converted into number of sharesInterest and redemption price is public in foreign agencyIt is listed and traded in the stock exchange

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CONCLUSION

FPI does not involve the control of foreign enterprise . Rather , the purpose of the investor is to maximize risk- adjusted return.

Select an optimal portfolio that gives the maximum return with a given level of risk or carries minimum of risk with a given level of return.

The optimal international portfolio represents a situation where the risk-adjusted return on the international portfolio is greater than the risk- adjusted return on the domestic portfolio alone by the greatest amount.

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REFERENCES

Vyuptakesh Sharan, “ International Financial Management”, Prentice Hall of India Pvt Ltd, New Delhi, 2006.

P G Apte : International Financial Management, 2nd Edition , Tata McGraw-Hill Publishing Company Ltd. , New Delhi.

P K Jain, Josette Peyrard, Surendra S Yadav, “International Financial Management”, Macmillan India Ltd, New Delhi, 2005.

Madhu Vij, “ International Financial Management”, Excel books publications, New Delhi, 2001.

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